Risks to Palestinian Financial Stability and Possible Opportunities for Growth

Middle East

Risks to Palestinian Financial Stability and Possible Opportunities for Growth

Posted on: 4th July 2017

The Palestinian economy is increasingly dependent on Israel, through remittances from Palestinians working in Israel, as well as tax clearance revenues that Israel collects and transfers to the PA every month. While the PA’s fiscal stability improved in 2015 and 2016, and it managed to reduce its deficit despite the drop in donor aid, political stability and calm are absolutely vital to secure economic growth and fiscal viability.

The recent, relatively positive fiscal performance must be leveraged in 2017-2018 to ensure longer-term growth. The PA and the donor community can seize this opportunity for a strategic change of course, and shift aid towards development, focusing on upgrading the Palestinian economic infrastructure. External aid would thus become an anchor of a new wave of investments in the Palestinian economy. Such a shift towards higher level of investment would reduce the risk of sliding towards recession, and generate a move towards renewed, sustainable and strong economic growth. Such a development plan for the West Bank, in conjunction with accelerated implementation of the Gaza Rehabilitation Plan, could be an economic and political game-changer for the stability of the PA, and Palestinian-Israeli relations. Economic growth in the West Bank and Gaza Strip will encourage stability and reduce the risk of violence.

The modest economic growth in the PA, however, remains deeply dependent on the security situation. The main factor currently supporting the West Bank economy is remittances from Palestinian workers in Israel. A serious deterioration in the security situation in the West Bank, as a result of political instability or renewed violence, may lead to the cancelation of thousands of labour permits and/or considerable constraints to movement. This would likely prompt a severe economic recession, with a detrimental effect on household incomes and unemployment.

The PA’s budget and finances are dependent on receiving tax revenues from Israel on a month-by-month basis. Any withholding of the these taxes by Israel would mean the PA would likely be unable to pay its civil servants and security forces, and a prolonged freeze on the revenues could lead to the PA’s collapse.

The opening up of Gaza is essential for Palestinian economic growth. The passage of goods to Gaza through the Israeli-controlled crossings has significantly increased the PA tax revenues since 2015. However, if there is a significant shift in the movement of trade to the Rafah crossing with Egypt, without PA presence to collect import taxes, this will lead to the loss of revenue and destabilise PA fiscal stability further.

A renewed, credible process of negotiations between Israel and the Palestinians is needed to underpin economic growth, and help generate the necessary confidence of donors and investors in the Palestinian economy.

This report identifies immediate risks for 2017-2018 and suggests a set of "stability indicators" that should be monitored in order to enable the parties to take the necessary actions in time to mitigate these risks.

In addition, the report identifies certain opportunities that should be seized in 2017-2018, and presents recommendations to ensure greater stability for the Palestinian economy.

Read the full report (PDF).

The report is also available in Arabic (PDF) and Hebrew (PDF).

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